ii view: why AO World shares are worth 30% more today

A stock market value bigger than Dixons and its shares remain buoyant. 

First-half trading update to 30 September  

• Expects revenue up around 57% to £715 million
• UK revenue up around 54%, Germany up 83%

Chief executive John Roberts said:

"The last six months of trading have been like no other during my two decades in the business. AO was in good shape coming into this financial year and the global, structural shift in customer behaviour to online, accelerated by Covid, emphasised our strengths.

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"The progress that we've made in Germany gives us the platform and confidence to grow.  We remain excited by the opportunities ahead and ambitious to realise them.

"Whilst we remain mindful of the uncertain economic climate caused by the pandemic and Brexit, we are on track with plans and well set for our biggest ever peak trading period in the UK and Germany."

ii round-up:

Online electrical retailer AO World (LSE:AO.) today flagged expectations for a 57% increase in first-half sales to over £700 million given strong consumer demand during the pandemic. 

UK sales are likely to be up around 54%, while German sales, where AO began selling in late 2014, are likely to have grown by over 80%. 

AO shares surged by more than 30% in UK trading to hit a new high and are up over 200% in 2020 alone. Shares of online mammoth Amazon (NASDAQ:AMZN) are up around 80% year-to-date, while shares of bricks and clicks retailer Dixons Carphone (LSE:DC.) are down by nearly a third. AO’s stock market value now exceeds that of Dixons.  

AO sells electrical goods, from kitchen white goods to TVs and toasters. From start-up in 2000, it has sold almost 2 million washing machines. It previously bought its own logistics operation to give full control and also offers both installation and old goods recycling services. It enhanced its mobile phone offering in 2018, buying Mobile Phones direct limited.  

For its UK business, sales momentum continued from the first quarter and into the second quarter, despite the reopening of competitor bricks and mortar outlets such as the Currys stores owned by Dixons. Less favourably, some increase in mobile phone contract cancellations has been suffered. 

In Germany, management remains confident that the business will achieve profitability on an adjusted earnings monthly basis, as it trades through the coming peak festive period and will be profitable in the full-year 2022 and thereafter.

First-half results are due 24 November.

ii view:

Headquartered in Bolton, AO World employs around 3,000 staff across the UK and Germany. During its last full financial year to the end of March, the UK generated just over 85% of overall sales, with Germany accounting for the balance. Its mission is to become the global destination for electricals. 

For its last financial year to the end of March it reported a pre-tax profit of £1.5 million compared to a loss of £20.2 million in the previous year. UK adjusted profit (EBITDA) rose 7% to £40.8 million, while losses for Europe including its closed Dutch business reduced to £21.1 million from a prior £25.3 million. 

For investors, the previous closure of its Dutch business and the fledgling status of its German operation offer some caution. Unlike rival Dixons, AO is also yet to pay a dividend and an estimated price/earnings ratio in the 30’s is comfortably above Dixons at less than 15. But a broader move by consumers to buy electrical goods online has clearly been elevated further by the Covid pandemic, and potential to expand overseas still beckons. In all, while market dips may provide better buying opportunities, investors taking the long-term view are likely to continue accumulating holdings. 
  
Positives: 

• Strong sales momentum
• Potential to expand overseas

Negatives:

• Elevated valuation
• No current dividend payment

The average rating of stock market analysts:

Buy